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Rebuilding the Iraqi Economy Through Neo-liberal Reform

Rebuilding the Iraqi Economy Through Neo-liberal Reform. Maj Tom Esposito, USMC NS3041. Introduction. Planned method for rebuilding the Iraqi economy How the current economy functions Success or failure of Neo-liberal reforms Recommendations for the future.

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Rebuilding the Iraqi Economy Through Neo-liberal Reform

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  1. Rebuilding the Iraqi Economy Through Neo-liberal Reform Maj Tom Esposito, USMC NS3041

  2. Introduction • Planned method for rebuilding the Iraqi economy • How the current economy functions • Success or failure of Neo-liberal reforms • Recommendations for the future

  3. Initial method for rebuilding the Iraqi economy: • Immediate implementation of Neo-liberal reform, a.k.a.: “The Washington Consensus” • 10 point plan • 4 key provisions: • Foreign investors allowed 100% ownership of Iraqi assets • Foreign banks welcome • 15% tax cap, 5% tariffs (none on food/humanitarian items) • All State Owned Enterprises (SOEs) [except oil] to be privatized

  4. Advantages of Neo-liberal reform: • Establishes a viable banking sector • Strong banks are essential to a modern economy. • Low tax rates: • Encourage investment incentives. • Foster employment. • Limit size of government. • Facilitate quick & smooth integration into world economy.

  5. Disadvantages of Neo-liberal Reform implementation in Iraq: • Productive investment unlikely to occur. • “All pain and no gain...” • Unemployment • Inflation • Economic instability • Privatization of SOEs inappropriate. • Asset stripping vice investment • Public perception problem • Immediate unemployment for workers of inefficient industry • Toll on national morale & political stability. • Displacement of Iraqi capital (by foreign capital)

  6. How the current Iraqi economy works: Not well... • Cash economy • Monetary policy ineffective. • ‘Shadow’ economy- 65% GDP • ‘Coping’ economic activity: • Subsistence agriculture • Petty trade • Home-based businesses • 30-50% unemployment • Government subsidies • Food • Fuel • Black-marketeering across boarders • Oil revenues generates 90% of Gov’t income. • Pre-condition for “Dutch Disease.” • Economy is currently in a state of “consumption” vice “investment”

  7. Economic Psychology of Iraq: • Pre-Ba’ath period: • Vibrant and entrepreneurial culture • Regional economic leaders • Post-Ba’ath period: • Corruption • Culture of entitlement • Welfare state • Free-market isolation.

  8. Is Neo-liberal reform appropriate? • Neo-liberal approach is not evolutionary: • No automatic adaptive policy • Difficult to see immediate results on a micro-economic scale. • Requires established institutions to flourish. • Requirements: • Stable environment • Security, rule of law • Property rights • Functioning markets • Private sector initiative

  9. Recommendations for the future: • DO NOT implement “shock therapy” economic reform • Medicine is worse than the disease (see: Chile) • Near-term pain. • DO implement “gradualist approach” (see: Asia) • Each country is different therefore, radical implementation of Neo-liberal economic policy must be based upon evaluation of the institutional capacity to accommodate reform. (see: Eastern Europe vs Russia).

  10. Conclusion:Neo-liberal reform policy application • Macro-economic stabilization and structural reform are too complicated to be ‘superimposed from the top’ in the case of Iraq. • Petrolium revenue should be used mainly for public infrastructure (not for the general financing of government).

  11. Next Steps • Aggressively pursue policies for economic diversification (away from Petroleum sector) • Manufacturing • Agriculture • Total Emphasis on: • security • rule of law • private property rights • Anti-corruption • Government transparency

  12. Next Steps • Reorient economy • From: foreign investment & exports (oil) • To: development of domestic production and market • Oil Asset Distribution Fund • “Direct distribution fund” • Increases private capital base. • Decentralizes financial decisions • Raises political engagement. • Tax base is not oil-based (except infrastructure) • Gov’t accountability and transparency • Regional grievances diminished • Encourages private sector “demand-led growth” enabling “supply-side growth” in the future.

  13. Virtuous Circle: Supply-siders vs. Keynesians • Say’s Law: “The supply of one good constitutes demand for one or more other goods...” • Short-term ‘demand-growth’ (Keynesian) to facilitate long-term ‘supply-growth’ (Neo-liberal) • Stimulate Demand: • Citizens have money to spend = Demand → private sector activity. • Private sector activity facilitates Neo-Lib. growth...

  14. Final Thoughts: • Formula for success: • Evaluate strength of target country: • Security climate • Institutions: Gov’t & financial • Market place & civil-societal health • Speed of reform implementation must complement tactical ‘facts of on the ground.’ • economic doctrine must be flexible • Security, security, security. • Rule of law • Property rights • Transparency

  15. Questions?

  16. Real Life example of Market Economy in Action • Iraqi government bond valuation • Babylon Fund mutual fund • NS4031 Politics and Security in Iraq/Iraqi economy/babylon fund.pdf • Inflation controlled • 50% in 1990s • 4.7% in 2008

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